Private Limited Company – Definition, Advantages and Incorporation Process

A private limited company is an attractive business model as it is a company with a minimum paid-up share capital of 1 lakh. For incorporation, the company require a minimum of 2 directors. However, the company's share is held by privately by individuals and cannot be traded publically.

What is a Private Limited Company?

A company that is privately held, the liability of the members is limited as compared to other companies. Such companies need to have a minimum of 2 members and a maximum of 200 members. A private company is based on shares. However, unlike a public company, these shares are not traded in the stock market. And so, these companies are often referred to as 'unlisted companies’

Characteristics of PVT Ltd Company

Treatment of Shares

The shares are privately held by closely knit groups. Most of the people who own the shares in a private entity tend to be the relatives, friends, angel investors or employees of the founder.

Size

Although most private companies are run as small businesses, there are some large corporations that continue to run as private entities even though the shares cannot be trade publically. For instance, Google India is a private limited company.

Raising Money 

In case a private company wants to increase its funding, it could raise the same from its shareholders or listing its debentures or can also attract equity funding which other types of businesses are unable to do so.

Going Public 

A private company can also choose to become a public company by issuing shares to the public. This is called IPO or Initial Public Offering. Once a company goes public, the stocks are traded in the stock market.

For example, ICICI Prudential Life Insurance changed its private structure and went public in 2016. The insurance company raised a whopping INR 6057 crores. It became the second largest IPO in the country and was the first IPO by an Indian company.

Private Limited Company Examples:

Here are a few examples of some well-known brands that operate as private entities:

 

 

List of Famous Companies incorporated as Private Limited Company:

  • One97 Enterprise Mobile Solutions Private Limited: PayTM
  • Life Style International Private Limited
  • Google India Private Limited
  • American Express (India)Private Limited
  • Forbes Marshall Private Limited

Documents Required for Incorporation

Following basic documents are must for incorporating a private limited company.

Address Proof

Address Proof
Proof

Identity Proof

Identity Proof
Proof

Registered Office

Registered Office
Bills

Photo

Photo
Proof

 

1. Applicant Details

Identity Proof

Following documents are acceptable with MCA.

  • Scanned copy of PAN Card and Aadhar Card (all directors)
  • Driving License
  • Voter ID
  • Passport

Address Proof

  • Latest bank statement
  • utility bill (not older than 2 months)

2. Registered Office Proof

  • No objection certificate from the owner of the utility bill
  • Rent agreement (notarized)
  • House Tax receipt if you own the property

3. Photo of the Applicant

latest passport size photograph of all applicant/ directors

Process to Incorporate a Private Limited Company

To encourage quicker registration timelines, the Ministry of Corporate Affairs (MCA) has enabled a fast-track online company registration process. 

STEP 0: Company Name Search

Before a company is incorporated the founders of the private limited company are recommended to search the company name as RUN can only be filed till 2 resubmissions and then you will have to pay Rs. 1000 again. You can use the Company name search tool which is free of cost and can provide insight into the fact whether your company name is available or not.

STEP 1: Obtaining DSC (Digital Signature Certificate) 

The members who will be part of the company would need to have a DSC. The DSC for the first shareholder is mandatory as it would be needed while signing MOA and AOA of the company. Additionally, the proposed director would have to obtain a DIN, for which the DSC is compulsory.

STEP 2: Obtaining DIN (Director Identification Number)

The DIN numbers of the proposed directors are required to be intimated to the Ministry in the incorporation forms. Therefore, DIN is mandatory for the proposed directors of the company. 

STEP 3: Company Name via RUN Webservice

To reserve the name of a new company or change the name of an existing company, a simple online service called RUN (Reserve Unique Name) is used. 

Here are a few guidelines followed by the MCA while granting a company name: 

  • Unique and original. You can check availability using the company name search
  • Easy to remember, pronounce and spell
  • Simple and short
  • Distinctive
  • Not be identical to other companies or businesses
  • Not infringe on existing trademarks. You can conduct a trademarks search to be sure

The application for the company name is processed by the Central Registration Centre(CRC). The CRC will conduct a comprehensive check and give its approval or rejection of the name. Each name submission is to be accompanied by fees of INR 1000. 

Once the name is approved, it is valid for: 

  • 20 days: For a new company
  • 60 days: For an existing company
Pro Tip: If your company name is unique you can directly file SPICE form and save 1000 Rs of RUN services.

STEP 4: Draft of MOA, AOA

The Memorandum of Association and Article of Association are essential documents for the incorporation of any company. Both of these documents define the internal and external relations of the company with its stakeholders.

  • MOA: defines the objectives, capital, registered office, etc.
  • AOA: defines the rules and regulation for running and managing the company.

Both these documents are drafted by professionals and must be submitted along with subscribers’ sheet, which contains the DSCs of all the founding members.

STEP 5: Application for incorporation

Once the necessary documents have been prepared, the following form will have to be filed to incorporate the company.

  1. SPICe-32: Application for company incorporation

The following supporting documents should be attached to these forms

  1. e-MOA and e-AOA along with the signed subscribers' sheet
  2. INC - 9 Affidavit and declaration by the first subscribers and directors of the company
  3. Proof of office address: Lease deed / Conveyance / Rent agreement along with rent receipts
  4. Utility bills of the registered office (not older than two months)
  5. Form DIR – 2 (Consent of directors)

Note that, Form INC-22: Details of registered office address (might be required later if proof of address is not filed with the SPICe form)

Once all the procedures for company registration are complete, the Certificate of Incorporation will be issued to the company.

Advantages and Disadvantages of Private Companies

There are certain benefits and limitations of incorporating a private limited company. To start, you can go through further detail classification of private limited company advantages and disadvantages.

The Advantages of Registering a Private Limited Company

  • Limited Liability

Under the private limited company the liability of the directors is limited to the shares they own and in case the company is under financial stress then the financial asset of the shareholders will not be acquired.

Note: In case the stress over the company is in relation to a fraud the liability will solely land upon the shareholders.
  • Continued Existence

Even if the shareholders of the company keep on changing the company will remain in existence and keep on operating unless the company is closed or voluntarily wound up.

  • Restricted Trade Shares

The restriction on selling of the shares is another advantage for the owner of the company as it stops the hostile takeover of the company in any way. The shareholders of the company are not allowed to sell the shares to anyone unless the same has been offered to the existing shareholders and has been rejected.

  • Ease of doing business

The process of forming and performing other basic functionalities is easier in comparison to other types of companies. Raising funds is effectively easier as financial institution help private companies faster as compared to other business entities. PVT Limited companies can also raise funding through their shareholders as well.

  • Ownership Rights

A company is a separate legal entity and hence has a right to own, sell and rent a property on its own name. The shareholders will have no right or liability for the property owned or rented by the company.

Disadvantages of Registering a Private Limited Company

  • Restrictions

Shareholders cannot sell or transfer the shares to a person other than the current shareholders unless the same has been rejected. The shareholders also have a restriction on listing the shares of the company on any stock exchange. There is a restriction on the number of shareholders; that cannot exceed more than 200.

NOTE: These restrictions are to be mentioned in the bye-laws of the company's prospectus so as to save it from any kind of hostile takeover.
  • Limited Control

The founders of private limited do not have complete control over the company as it necessary to have at least 2 members to start a private limited company, unlike sole proprietorship where the single member is enough. The founders cannot execute or take important decisions without taking prior permission from other shareholders.

  • Legal Compliances

A private limited company is considered a separate legal entity and hence requires various legal compliances that are mandatory such as Annual return filing and if the same has not complied with the MCA will levy penalties which are to be paid even if the company has to be closed down.

Tax Implications of a Private Company

Although the tax slabs of a private company are high, there are considerably more attractive than a sole proprietor model, where the taxation would be based on individual tax slabs. Future, companies under Startup India and those that are MSMEs get attractive benefits.

Under the Finance Bill of 2018, the taxation of private companies for the Assessment Year 2019-20 is as follows:

If the gross receipts in the previous year (2016-17) doesn’t exceed INR 250 Crores 25% of Net Profit
All other cases 30% of Net Profit
Surcharge: If income exceeds INR 1 Crore 7%
Surcharge: If income exceeds INR 10 Crore 12
Health and Education Cess 4% on the aggregate of income tax and surcharge
Dividend distribution tax 15% (Plus Surcharge and Cess)

Tax Benefits under Startup India

In 2017, a new section was introduced in the Income Tax Act. Section 80 IAC provides a 100% deductions of the profits of ‘eligible start-ups’ for three consecutive years out of seven years.

Eligible Startups

‘Eligible business’ of start-ups includes innovation, development or new processes and products, or any new services based on new technology and intellectual property. This includes scalable business models that have a high potential to generate wealth and employment opportunities.

Exemption Provided to Private Limited Companies

Ministry of Corporate Affairs has provided private limited companies with special exemption concerning disclosure of related party transaction, Issue of share capital after the company is incorporated, moreover the company is exempted from filing board resolution with MCA.

  • If party related transaction is with the subsidiary company or an associate company only private limited company has an exemption of not disclosing it.
NOTE: Any transaction which is not with a holding, subsidiary or an associate company will have to be disclosed.
  • Private limited companies that are limited by shares have an exemption to have 2 types of shares i.e.equity and preference share capital.
  • A private company can decide the voting rights of the equity and preference shareholder.
NOTE: This can only be done if this either mentioned in memorandum or article of association.

For offering stock options for employees (ESOP) the companies have to pass a special resolution but the private limited company is exempted from such condition; the company needs to just pass an ordinary resolution with a majority.

NOTE: Public limited companies are also provided with the exemption similar to a private limited company.
  • A private limited company cannot accept deposit from the public but they have an exemption to obtain it from its members subject to rules and regulations of company law.

Why do Larger Companies Choose to Remain Private?

Despite the lack of access to public funds, large companies choose to remain private because:

Privacy

A public company would have to disclose the stocks and holdings of their key management and board of directors, along with their salaries. Also, public companies have stricter compliance norms with regard to furnishing financial reports, etc, which would be accessed by the public.

Stock prices

The value of the company’s stocks depends on several market factors. This could lead to severe fluctuations despite the fact that the company is financially sound. For instance, a crash in the economy would reflect on the prices of the shares and this could put the prospects of the company in jeopardy.

Loss of Control

A public company essentially means several shareholders. The founder of the holding company of the private entity might not want to dilute the control.

Example: The founder of a public company cannot take any decision on his own and must call a board meeting and general meetings. However, in a private setup, the founder can easily sway the few shareholders in his favour, even more so if he has maximum holdings.


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